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Clear Implications of the Greek Financial Crisis

August 12, 2015

No matter how the final negotiations come out around August 20, a number of very central conceptions and policies were critically wounded during the dramatic, months-long bailout confrontation between the Greek government and its major creditors (the troika of the European Commission, the International Monetary Fund, and the European Central Bank).

The architects of the Eurozone, can no longer paper over the fundamental structural reforms necessary to make the Euro work.

The Euro may no longer be even credibly the mark for the success of the European Union or European integration, even as many EU members have never been part of the Eurozone in the first place and had no immediate intention of joining it.

The northern European countries are no longer willing, solely in the name of European integration, to subsidize the poorer littoral states indefinitely and without fiscally sound and enforceable conditions.

Sermons from the political leaders of non-creditor countries about the need to pay for solidarity will be met more forcefully by responses emphasizing the sister-virtue of responsibility.

The negotiations over the 3rd bailout tranche of €86 billion for Greece are still on-going but its terms could improve stability within the Eurozone by providing a framework of conditions for future support to the Eurozone’s poor performing economies, not just Greece.

Public credit and any guarantees by the troika will also be more carefully negotiated. The northern countries will be much more watchful about the conditions for any public financial support.

Banks had best be more careful about lending to the poorer European countries and not rely on any “implicit” guarantees of those loans by Europe’s richer countries.

The cost for private borrowing by the poorer Eurozone countries will therefore surely rise, commensurate with the now-clear increased risk that the northern European countries will not necessarily guarantee their debts. (Greece borrowed at a fraction of the rate available to it before its entry into the Eurozone. Presumably the spread in rates between its borrowing before and after that entry will now diminish.)

Even within the mainstream center-right parties of the creditor countries, conservative dissenters from the proposed 3rd tranche of funding have grown more vocal and will probably become more active. Apart entirely from the new right-wing parties, the central parties are likely to become more conservative on economic and social policies in the EU, and their leaders can expect more dissent. That will make further accommodations within the Eurozone more difficult.

This is not all bad. It puts both the EU and the Eurozone on a more realistic basis.

The potential for a departure from the Euro will now be mapped, if only as a contingency. Certainly the prospect of exit has increased, so wisdom would suggest that exit paths be charted. No-exit is no longer the only option, as evidenced by the creditor countries of the north growingly willing to see Greece withdraw…and they still are if the promised Greek reforms are not actually implemented.

Indeed, the prospects for an exit from the EU, never mind the Euro, by non-Eurozone Great Britain is greater now than before the Greek crisis…assuming that Great Britain remains integrated itself.

The prospects for admitting additional “candidate” or “association” members to the EU has also diminished.

Conversely the EU and certainly the Euro are somewhat less attractive to EU aspirants, for example in the Balkans or in Georgia, and (sadly) maybe even Ukraine. They have few viable options however.

The prospect for Turkey’s membership in the EU in any immediate future is now even closer to zero than it was.

The conditions for future borrowing by Greece will diminish dramatically as will the many direct and indirect subsidies Greece enjoyed during its period of borrowing. The prospects for Greeks will be very much harder: the general unemployment rate of over 25% (and over 50% for youth) will surely climb; poverty will grow; the recession will deepen. Already harsh, life for most Greeks will become yet more austere, even with (in fact especially with) the new borrowing package.

Whether in or out of the EU or the Eurozone, Greece will need to decide what kind of economy (and country) it wants to be, then adopt apposite policies and take the appropriate measures and consequences. This has never been a serious question before, but now it is.

Greece’s sister EU states in the south and the west will need to do the same.

The economic casualties of the Greek drama—especially the borrowing capacity and conditions—will be visited not just on Greece and its impoverished population but on its neighbors as well.

If Greece does exit the Eurozone, what sort of society and economy will it have and at what cost to its neighbors (for example, in terms of its destination for migrants)? What kind of arrangements can me fashioned to keep it in the European Union? How and on what terms will it borrow? What will the effect be on its domestic budget? How will it finance its current account deficits? How will it reduce its need for borrowing?

Greek banks, with much less capital and much tighter capital controls, will struggle to perform their normal functions.

Greeks may return to more bartering, as faith in solvency of banks and other financial institutions fades.

Although its instability could create major problems, Greece is, at best, of secondary geopolitical importance for Europe, an illustration perhaps of some structural and policy dilemmas. The main geopolitical event is Ukraine. But attention to Ukraine—and resources to help deal with its problems—are among the casualties of the Greek tragedy, which absorbed far too much of Europe’s attention.

Once again, there is no free lunch. The European buffet has now closed, or at least will reopen under new management and policies.

American officials, academics, and quasi-officials might better hold their gratuitous advice (especially about the need for generosity and deficit spending) at least until the American budget is under better control and the increases in recent increases in social spending are fully factored into the US budget accounts…and preferably paid for. It would perhaps be better if they satisfied their urge to travel by visiting and advising, say, the Venice in Illinois rather than the one in Austria. (Illinois state general obligation bonds, the result of massive borrowing to cover expenditures beyond revenues, especially for pensions, are just above Spain’s. Chicago’s bonds are now rated as “junk.” Recommendations to investors are negative for both.)

Gerald F. Hyman is a senior adviser and president of the Hills Program on Governance at the Center for Strategic and International Studies (CSIS) in Washington D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).